In a market briefing, Alicia Garcia Herrero argues that the yen weakness is a key driver behind the Bank of Japan policy tilt and the government’s path toward a long-awaited rate hike this month.

Despite elevated tariffs and geopolitical headwinds, Japan’s economy shows unexpected resilience, with inflation expectations across the short-, medium-, and long-term horizons remaining above the 2% target, supporting policy normalization.

Rising food prices have lifted core inflation, while the yen-to-dollar rate hovering near 155 heightens imported inflation risks, underscoring budget and monetary trade-offs. Herrero projects a 25 basis-point lift to 0.75% at the Dec 19 meeting.

Looking ahead, if the yen fails to stabilize and real incomes remain pressured, authorities may pursue further tightening, potentially opening room for another 25 basis point increase early next year.